Spousal inherited IRA taken as own

Submitted by Mhotchkiss on Tue, 2020-06-30 13:30

If a spouse inherited her husband’s IRA and took it as her own, rolling it into her own IRA, would there be a way to “undo” this and put the money back into Inherited status in order to avoid penalty on distributions since she’s under age 59 1/2?



Submitted by Alan - IRA critic on Tue, 2020-06-30 14:18

Unfortunately, no. Once an IRA becomes an “owned” IRA, it cannot revert to inherited status. This mistake often leads to the spouse having to initiate a rigid 72t (SEPP) plan to accomplish the penalty waiver.  The amount the spouse will need prior to 59.5 is the key to determining whether such a plan is worth the hassle. If the plan is busted at anytime, spouse will owe the penalty back to day 1 plus interest. There are also other penalty waiver situations such as distributions for high medical costs, disability, higher education, first home, etc. 

Submitted by [email protected] on Tue, 2020-06-30 14:47

Thank you Alan.  What are the requirements for “first time home” exception?  Apparently, this client is needing distributions from this IRA to qualify for a home loan.  I was aware of the SEPP solution and know that is onerous.

Submitted by Alan - IRA critic on Tue, 2020-06-30 15:43

  • The first home exception is limited to 10,000 lifetime to pay acquisition costs of a first home, with the homebuyer not having owned a main home in the prior two years. These costs must be paid within 120 days of receiving the IRA distribution.
  • Of course, if the person happened to qualify for a CRD up to 100k, the penalty would be waived and income could be reported over 3 years. Qualifying for a CRD has just been made easier, so that might be checked as a source of funds. A CRD must be distributed by 12/30/2020.

Submitted by Mark S. Littleton Sr. on Tue, 2020-06-30 22:27

(Note: My first RMD) On 3-30-2020 I took the balance of my 2019 RMD of $7,404.86 from my traditional IRA CD account. Since then I have learned I can actually rollover that same amount by Aug. 31,2020 to a new IRA avoiding the tax on my 2020 return. Secondly I need to open a new SEP IRA by my extended date of Oct 15, 2020 of $9,658.00. Question is can I rollover the $7,404.86 into the new SEP IRA adding $2,253.14 to it to obtain the SEP IRA amount I need of $9,658.00. 

Submitted by Alan - IRA critic on Tue, 2020-06-30 23:03

The above is a duplicate post. See response in your other thread.

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